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Yum! Brands (NYSE:YUM)

Q3 2011 Earnings Call

October 05, 2011 9:15 am ET

Executives

Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

Richard T. Carucci - Chief Financial Officer

David C. Novak - Executive Chairman, Chief Executive Officer, President and Chairman of Executive/Finance Committee

Analysts

Keith Siegner - Crédit Suisse AG, Research Division

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

David Palmer - UBS Investment Bank, Research Division

John S. Glass - Morgan Stanley, Research Division

Mitchell J. Speiser - Buckingham Research Group, Inc.

Michael Kelter - Goldman Sachs Group Inc., Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Larry Miller - RBC Capital Markets, LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Unknown Analyst -

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Jason West - Deutsche Bank AG, Research Division

Operator

Good morning. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Tim Jerzyk, Senior Vice President of Investor Relations. Sir, you may begin.

Tim Jerzyk

Thanks, David. Good morning, everyone, and thanks for joining us. This call is being recorded and will be available for playback. We are broadcasting the conference call via our website, www.yum.com. Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording.

I would also like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release released last night and the risk factors included in our filings with the SEC. In addition, please refer to the Investors section of the Yum! Brands website to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call.

Finally, we would like you to be aware of a few upcoming Yum! investor events. Our Annual Investor and Analyst Conference in New York City will be Wednesday, December 7. Please register for that as soon as possible. Monday, February 6, 2012, fourth quarter earnings will be released. This was previously scheduled for February 1, so please adjust your calendars.

On our call today, you will hear from David Novak, Chairman and CEO; and Rick Carucci, our CFO. Following remarks from both, we will take your questions. Now I'll turn the call over to David Novak.

David C. Novak

Okay. Thank you, Tim, and good morning, everyone. Before I talk about our third quarter performance, I think it's interesting to note that this Friday, October 7, is our Founders' Day and marks the 14th anniversary of our company. From the very beginning, our formula for success has been people capability first, satisfy customers and profitability follow. I'm proud of how we win together, ownership culture we have developed and pleased with the strong returns we have generated for our shareholders, with our share price up well over 500% since our spinoff from PepsiCo. I'm even more pleased we continue to have tremendous optimism about the future growth of our company.

Our people know the 3 keys to driving shareholder value, and believe me, we are focused on them now more than ever: new unit development, same-store sales growth and return on invested capital. Our new unit opportunity in China is the best in retail, and our opportunity to expand is bigger than ever as we know India, Russia, Africa, France and Germany have all reached inflection points for growth. We are also laying a foundation for more substantial same-store sales growth in our 38,000 restaurants by developing breakfast, beverages and broader menu variety that will leverage existing assets and make our brands even more relevant. Meanwhile, our returns should continue to be among the best in retail, with return on invested capital of over 20%.

I often say the best thing about business is the unfinished business. Clearly, we are on the ground floor of global growth with decades of unfinished business ahead.

Now onto our results. I'm pleased to report 13% EPS growth for the third quarter, excluding special items, and confidently reaffirm our full-year EPS growth forecast of at least 12%. We are proud that 2011 will mark the 10th consecutive year we exceed our annual target of at least 10% EPS growth. Our strong performance in China and other emerging markets continues to be the catalyst of our growth. We now expect to open about 1,500 new international units this year, which not only adds to earnings for 2011, but sets us up for an incremental growth in 2012.

We are particularly pleased with our China business, which reported record transaction growth and record expected new unit growth. There's no question China has powerful brand equity of both KFC and Pizza Hut with outstanding new unit returns. At Yum! Restaurants International, system sales grew 8%, including 13% system sales growth in emerging markets, both prior to foreign currency translation. In the U.S., we saw another quarter of poor results in what remains a tough environment.

Now let me take you through our key strategies and trends for each of our divisions. First, I'd like to thank all of you that attended our recent China Investor Conference in Shanghai and saw the leadership and tremendous operating team we have there. I'd like to thank Sam Su and the team for hosting our guests at this great event.

I'm obviously very proud of our China team's continued strong performance. For the third quarter, units expanded 14% and same-store sales grew 19%, driven by same-store transaction growth of 27%. Our China division's operating profit has grown 15% year-to-date, excluding the impact of foreign currency translation. Operating profit grew 7% this quarter, excluding foreign currency translation. Keep in mind that we are overlapping our participation in the World Expo in Shanghai, which added about $10 million of profit to last year's number. Excluding this overlap, our China team delivered another double-digit earnings growth quarter.

New unit development continues to be the major driver of our growth, and we remain the largest U.S. retail developer in China. We've opened 329 new units through our first 3 quarters and expect to open a record 600 this year, which will be record development year for us in China. Our China new unit returns remain a key focus for us and continue to be the best in our business.

Now let me share with you a few highlights from each of our leading brands in China. Let's start with KFC. We added 110 new units this quarter and now have nearly 3,500 restaurants, making KFC the largest Western QSR concept in China. While we're certainly viewed as the chicken experts, our menu includes beef, seafood and rice dishes, as well as other products with broad appeal to Chinese customers. Our brand strategy is to be rooted in China, and our diverse menu offerings are proof positive we are delivering on this goal.

We are working on 4 key initiatives that will grow the business and build strong unit economics well into the future:

First, KFC breakfast is in virtually all of our restaurants. Our breakfast daypart has seen its transactions double this year, accounting for about 30% of total transaction growth. Our menu has broad appeal to Chinese consumers, who are increasingly eating breakfast outside of home. We made the decision to offer compelling value to drive traffic to build this underutilized daypart. We knew this would have a negative impact on our check average and in fact, accounts for about half of our total check decline this year. Even with all this transaction success, breakfast still accounts for 7% -- only 7% of our overall sales. We are clearly on the ground floor of building this important daypart.

Next is delivery, which is now available in over 1,600 KFC restaurants. This fast-growing delivery segment is primarily in higher tier cities. We're also expanding our 24-hour operations initiative now in about 50% of our restaurants.

Finally, let me talk about our new lunch and afternoon snack value initiatives. As we look at the inflationary environment and the Chinese consumer sensitivity to rising prices, we made the conscious decision to bring even more customers into our restaurants. This has resulted in extraordinary traffic gains. With that said, higher inflation more than offset the modest pricing we took earlier this year and was the primary driver of our decline in margins. As you would expect, we're taking very prudent steps to adjust this going forward. As you saw, our third quarter margins were still over 21%, and we expect margins to continue to sustain in the 20% range on an annual basis.

Any way you look at it, the KFC brand in China is having an incredible year. All our research tells us we're building our leadership position and making our brand even more relevant. The tremendous increases in new units and traffic puts us in a nice position to continue our strong growth in 2012.

Now we also have achieved tremendous growth and vibrancy at Pizza Hut in China. Pizza Hut Casual Dining goes beyond pizza and continues to unquestionably be the leading western casual dining concept in China, with over 560 units in over 120 cities. This quarter marks the seventh consecutive double-digit same-store sales growth quarter for Pizza Hut Casual Dining. The menu is revamped twice a year and continues to offer a broad variety of entrées, including beef, chicken and rice dishes, along with appetizers, beverages and desserts.

We are having tremendous success building a true casual dining concept with everyday affordable value. In fact, our new unit returns are now comparable to KFC, and we expect to open about 100 Pizza Hut Casual Dining restaurants this year. We're especially pleased to be opening Pizza Huts not only in the largest cities but in Tier 3, 4 and 5 cities as well.

We also continue to invest behind the development of our emerging brands. Pizza Hut Home Service in the home service delivery category now has over 120 units in 12 cities. East Dawning, our Chinese fast food brand, continues to make progress as we drive for scalable economics.

In summary, our China business is having a fantastic year. The progress we're making in executing our China strategy to build leading brands in every significant restaurant category is exceptional.

Next, Yum! Restaurants International. Before I speak about this quarter's results, I'd also like to thank all of you that attended our YRI Investor Day in Dallas this past August, and saw our leadership present the tremendous emerging market opportunities we have, as well as the recent success we're having in France and Germany. I'd like to thank Graham Allan and the team for hosting our guests at this event.

For the quarter, YRI produced solid results, with system sales growth of 8% and operating profit growth of 3%, both prior to foreign currency translation. Same-store sales increased 3%. Operating profit was negatively impacted by $6 million or 5% due to anticipated closures related to our decision to completely refranchise our Pizza Hut business in the U.K. As our focus shifts to high-growth, high-return businesses, we decided this business would be better served in the hands of a capable franchisee. The refranchising decision for this business reinforces our commitment to shareholders to leverage high-return franchise fees and concentrate even more company equity on high-growth, high-return businesses in emerging markets.

New unit development is a key driver of growth for this business and continued with 193 new units this quarter, including 127 new units in emerging markets. Over 90% of these units were opened by our strong network of franchisees, and we continue to expect to open about 900 new units at Yum! Restaurants International for the full year. It's the new unit development, specifically in emerging markets, that sets Yum! apart and is positioning YRI for many successful years in the future. Over 85% of the 14,500 traditional restaurants in this division are franchise units, which generate a steady growing stream of franchise royalties.

Yum! Restaurants International has 5 markets we are particularly excited about: India, Russia, Africa, France and Germany. Last year, these markets contributed about $60 million of profit to YRI, but our projections call for that number to grow to over $300 million over the next 5 years.

Today, I want to talk about 2 of these significant opportunities, Germany and Russia, where I recently spent time with our talented local teams. Before I talk about Germany, I think it's important to briefly discuss the success we're having in France to give it some context. Our restaurants in France actually have the highest average unit volumes in the world for Yum!. It's also the first market where we experimented with a business rental program to drive unit development and returns. The reason I bring this up is that we've taken this successful model and applied it to Germany.

Today, in Germany, we have 75 KFCs, mid-teen margins and more transactions per store than we do in France. The team is committed to tripling its restaurant count to 225 units in the next 5 years. Remember, our experience tells us it takes time to build a brand the right way, but once you get to about 100 units, your scale allows you to accelerate growth. Within the next 18 months, we plan on utilizing national television advertising for the first time because of that scale. As I said, our transaction volumes are strong. We've also averaged 5% same-store sales growth over the past 5 years, and we now have margins in the mid-teens. So our new unit economics are coming together.

Our challenge going forward is to secure great sites in Germany as fast as our people capability allows. KFC has a long way to go in Germany. The team is rallying behind the slogan, KFC wonderland in the making, and after seeing the business first-hand and seeing the action Joaquin Grip [ph], our Germany General Manager, and his team are taking, I'm confident that we're going to get there. We know that McDonald's makes more money in France and Germany alone than we make in all of Yum! Restaurants International. Our intention is to build a big business in these countries as well, and we're making significant progress to do just that.

Russia is another country where we have to tip our hat to McDonald's, who we estimate makes over $1 million profit per restaurant annually. We also have aggressive growth plans in Russia. In July of last year, we completed our acquisition of Rostik's and got full control of the KFC Rostik's brand in Russia, giving us 151 restaurants. Recently, we began rebranding the KFC Rostik units to KFC stand-alone restaurants. Our results have been excellent. This year, same-store sales growth has been over 20%, and restaurant margins are in the high teens. The best is yet to come as we are just getting started with our single-minded focus on KFC in Russia.

Overall, Yum! Restaurants International growth and development is on track. It's great to see our leading position in emerging markets complemented by ground-floor opportunities in Continental Europe. Our strategy remains to drive aggressive expansion and build strong brands everywhere.

Next, onto our U.S. business, where focus is to improve our brand positions, consistency and returns. As indicated on our second quarter call, we knew operating profit would be challenged in the third quarter, and it was. Operating profit declined 16%, as same-store sales fell 3%. And higher commodity costs weighed on margins.

Taco Bell, our largest and most profitable brand in the U.S., saw same-store sales decline 2% in the quarter. While this is not an acceptable result for us, it is an improvement from the 5% decline we saw in the second quarter, and it's versus more difficult comparisons from last year. The team is working incredibly hard to get Taco Bell back on a growth track, and we are confident we will do so. We have market-tested category-breakthrough innovation in the pipeline that will reenergize the Taco Bell brand towards the end of the first quarter of next year. In the meantime, it's all hands on deck to get Taco Bell back on the growth track.

Overall, while our U.S. business results have certainly been disappointing, we have aggressively developed category-leading innovation and have productivity initiatives planned to dramatically improve both sales and profit performance in 2012.

Let me wrap up the total Yum! story. Overall, we're having another solid year. 10 straight years of double-digit EPS growth is something not too many companies can claim. With very strong performance in China and other emerging markets, as well as robust new unit international development, we're confident in our future growth as well. So as we look to 2012, we're confident our international businesses are set up for continued growth, and we have plans in place to dramatically improve U.S. profitability. We have a track record that proves how powerful our growth model is. With the expected opening of 1,500 international new units this year and our strategies in the base business, we're in a good position for next year and expect to continue our track record of double-digit earnings growth in 2012 and beyond.

Now let me turn it over to our Chief Financial Officer, Rick Carucci.

Richard T. Carucci

Thank you, David, and good morning, everyone. Today, I'm going to provide some commentary on our third quarter results and our outlook for the balance of 2011. I will then review changes we are making to our business portfolio and provide some of our initial expectations for 2012.

During the first 2 earnings calls this year, I categorized our 2011 results as a tale of 2 cities. Strong international growth, especially in China, has been a contrast to poor U.S. performance. This quarter is essentially more of the same.

China produced another impressive quarter. Revenue increased an amazing 35% as we benefited from new unit growth, same-store transaction growth of 27% and favorable foreign exchange. On the other hand, profit growth and margins were less than what we would expect with this type of sales increase. Operating profit grew 7% in the quarter, excluding foreign exchange, or 11% adjusting for the 2010 impact of the Shanghai World Expo. Margin declined 3.9 percentage points to a little over 21%.

Let me walk you through the details on margins. With commodity inflation of 8% and labor inflation of about 20% in the quarter, we had some significant headwinds. Margins in the quarter were also affected by the new business tax this year and the overlap of the Expo. Taken together, commodity inflation, labor inflation, the business tax and the Expo overlap caused about 7 points of margin pressure. The pricing we took in the first quarter helped to offset about 3 of the 7 points. There were some other moving pieces, but the gap between the inflation and pricing is by far the biggest contributor of the 3.9-point margin decline versus last year.

So let's briefly discuss some of the other moving pieces. First, our new unit development pace picked up significantly this year. The additional labor and preopening expenses offset some of the margin benefit of our transaction growth. Additionally, some of our same-store sales growth was driven by targeted daypart value initiatives that David walked you through. Due to the higher costs of these initiatives, the profit flow-through through this transaction growth was less than what you would normally expect.

Going forward, we realize we have some work to do to close the gap between pricing and inflation. We're taking actions to do this. Our first step was a 2% price increase implemented the last week of September.

Going forward, we expect even higher inflation in the fourth quarter. We now expect mid-teens food inflation and labor inflation of about 20% in the quarter. To help offset this, we expect to tweak our value offerings later this year. Despite these initiatives, this level of pricing still lags the impact of a high inflation rates. We therefore expect a decline in fourth quarter year-over-year margins.

We continue to expect restaurant margins of about 20% for the full year. Going forward, we see no reason why we cannot continue to deliver at least 20% margins in China. We believe that we will perform well financially because we have all the necessary leverage, including a strong competitive position, purchasing scale, a seasoned management team, a nationwide presence and expanding dayparts. In addition, the combination of our cell phone distribution system and large development team allows for profitable unit expansion in lower tier cities.

We really like our position in China. We have excellent sales momentum and expect solid double-digit same-store sales again in quarter 4. Our development continues to be robust. 600 new units is clearly an impressive number, and we continue to generate cash paybacks of less than 3 years. This is a portfolio that delivers high returns and high growth.

Let's move to Yum! Restaurants International. Our YRI business had another solid quarter, with same-store sales growth of 3%. Operating profit growth of 3% prior to ForEx included the impact of some onetime items. Excluding a $6 million impairment expense for the Pizza Hut U.K. business, operating profit growth was 8% for the third quarter. Additionally, YRI experienced a $4 million expense for the biannual franchise convention. On the positive side, we received $5 million generated from the change in ownership of one of our large KFC franchisees in Australia.

Restaurant margin declined 0.2 points to 12.3%. This decline was driven by soft sales and inflation in Australia and weak margins in the Pizza Hut U.K. business. Although margins continued to improve in Thailand and France, the year-over-year impact was less than in previous quarters. We still expect margins to improve significantly for the full year. As we continue to update our ownership portfolio and increase our scale in key markets, our margin should continue to improve.

Overall, we believe that Yum! Restaurants International business is gaining strength. We are particularly pleased with our new unit development and exceptionally strong performance in emerging and underpenetrated markets. We believe that these factors provide a solid base for sales and profit growth in 2012 and beyond.

Our U.S. business had a disappointing quarter. Sales improved versus the second quarter, but inflation hurt margins. Looking to the fourth quarter, we expect that sales will remain a challenge. We will likely see another same-store sales decrease. Fortunately, we expect to benefit from the overlap of high G&A costs from last year, as well as the 53rd week this year. This should help improve U.S. operating profits in the fourth quarter considerably.

As we finish looking at 2011, let me provide some more expectations about the impact of the 53rd week this year. The 53rd week provides a $25 million operating profit benefit. This represents a $0.04 EPS benefit in the fourth quarter. This benefit is split between the YRI and U.S. businesses, and for the full year, we committed about $20 million in higher-than-normal spending. This spending includes development and operational initiatives for our Pizza Hut U.S. business and the higher impairment expenses at Pizza Hut U.K.

The bulk of this spending is already reflected in our year-to-date financial results, while about $3 million of the $20 million is spending that is anticipated in the fourth quarter. When you put all of this together, we are still quite confident that Yum! will deliver EPS growth of at least 12% in 2011.

Before we look ahead into 2012, let's first reflect on some key decisions we made this year to realign the Yum! portfolio. Our philosophy is simple. We reduced company ownership in highly penetrated or underperforming markets. We increased exposure in emerging and underpenetrated markets. We have continued to be disciplined and proactive in managing this aspect of the business. In 2011, we made several decisions that will serve to reduce our financial footprint in highly penetrated markets.

First of all, we continued our U.S. refranchising program. This year's focus is on refranchising KFC restaurants. For the full year, we expect to refranchise about 400 restaurants, and the majority of these are KFC units. We expect to end the year with about 500 KFC company-owned restaurants. The game plan is to retain 5% ownership or less than 250 units.

This quarter, we also announced an agreement to sell Long John Silver's and A&W All American Restaurants. I know it's tough to run a business during a selling process, and I would like to thank the LJS and A&W teams for all of their hard work this year. The deal is expected to close in the fourth quarter, and we wish our franchise partners and the teams every success going forward.

In our release, we also announced a decision to refranchise our Pizza Hut U.K. business. We believe this will improve Yum! Restaurants International's profits and margins.

Every year, we increase our exposure in high-growth emerging markets through our new unit growth. This year, there are also 2 potential transactions that could increase our ownership in underpenetrated markets. We made a bid to acquire Little Sheep in China, and we plan to acquire a KFC South African franchisee. We are still awaiting China government approval and have nothing new to report on Little Sheep, so let me talk about Africa.

We expect to close on the South African deal later this month. We already have a great franchise business in South Africa with over 600 restaurants. We believe that the 70 units we're acquiring provide another growth vehicle in that country. These restaurants will also provide a base for us to train our franchisees in the balance of Africa. We remain hopeful that in the long term, Africa can become a large franchised business and a meaningful source of growth. In the past year, we opened KFCs in 4 new countries in Africa, and our goal is to spread aggressively across the continent. As we head into 2012, we believe that our portfolio has never been stronger, and that we're building upon our advantage in emerging markets.

We are still in the process of developing detailed plans for our businesses in 2012. Therefore, I will not talk about sales and profit plans today. As usual, we will share information on these subjects at our December meeting. However, I do want to share some initial thoughts for 2012 and some items that will influence our performance.

We are fortunate that our new unit development usually provides us with a head start on building a profit plan. This year is no exception. The development of 1,500 new units outside the U.S. in 2011 will provide us with a head start for 2012. Overall, we expect new unit development to contribute about half of our 2012 growth.

We expect to see benefits in 2012 from share repurchases. In our release, we have pointed to year-to-date 2011 share repurchases of $545 million. We expect about $800 million in repurchases for the full year and a similar amount in 2012. The impact of these share repurchases should provide 2 points of 2012 EPS growth.

While it's uncertain how the dollar will perform against most other currencies next year, it's probably a good bet that we get RMB translation benefits again in 2012. Now don't get me wrong. We expect 2012 to be another challenging year. The economic climate is very uncertain. Inflation could also rear its head, especially in the first half of the year.

We know that we need to turn around our U.S. business. But Taco Bell is a resilient brand, and we will have easy overlaps next year. As David mentioned, in addition to our innovation pipeline, we will be taking a hard look at managing costs within our U.S. business.

I do have a lot of confidence in our business model. I have faith in our team's ability to grow the business and manage costs tightly. Our global portfolio has led with 13% annual EPS growth over the past decade. This decade has included quite a few individual challenging years. I also just told you that our portfolio has never been stronger. Therefore, I believe 2012 will be another year where Yum! will deliver strong results for our shareholders.

Back to you, David.

David C. Novak

Okay, Rick. Thank you very much, and let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Palmer with UBS.

David Palmer - UBS Investment Bank, Research Division

I'm sure you're going to get a lot of questions about the China margins this quarter, and there are many reasons for that. You stated some of them. But just taking a step back, I'm curious about the strategy for China in 2011. Are you getting from this business what you thought you would get at the beginning of the year? And I guess, I'm drilling into the fact that you had accelerating inflation, and you knew that. You were also pursuing 2 major value-menu launches, one at breakfast earlier in the year, one at the beginning of the third quarter with the lunch stuff. And you -- and all this time, you've waited on pricing. Since late January, you have not raised price, and even in the -- back in January, it wasn't a hell of a lot of price. And then on top of that, you're embracing a rather expensive ramp-up in unit development here in the third quarter, putting further pressure on margins. And so I'm wondering, and I guess a lot of folks are wondering, why have you been so stingy on the price? And are you getting some sort of reactions on all this stuff that you weren't expecting? Any help on this will be great.

Richard T. Carucci

David will talk about the consumer side, and then I'll have the financial aspect of it, David.

David C. Novak

Okay. Well, first of all, David, our strategy is a brand-building strategy and an asset leverage-building strategy, and what we're trying to do is make our brand as compelling and as relevant and as ubiquitous as it can possibly be in China. And if you look at the real success factors in this category, you have a broad menu, you leverage your asset throughout the day and you make your products affordable on an everyday basis. And in China, we're doing this, and we're doing it with great margins this year. And I think what I feel terrific about is that we're getting everything that we want to get out of China. We're continuing to grow this business, and we have a great team of people there that are focused on building this brand and building dayparts and leveraging that asset throughout the day. But they are, first and foremost, brand builders, and I think that's what we're doing. We have tremendous operational excellence. We're maintaining fantastic operations as we're dramatically improving our transactions. Our average unit volumes now are $1.7 million. So we're getting -- our new unit cash flows and margins are as good as they've ever been, and so we're having another excellent year in China on top of a great year last year. So strategically, the only thing I think we've done is further solidified our strength with the customer. We will have -- this year, we're going to set a record for new units. We're going to have 600 new units. So just think of the transaction growth we're achieving, sales growth we're achieving, the margins that we have, and we're still adding a record number of 600 units. So to me, looking back and stepping back and looking at China, it would be hard for me to say, if I could -- if someone said, "Can we write this story? Last year, at the beginning of January, could we have this kind of performance?" I'd say, "Give it to me. Give it to me this year. Give it to me next year. Keep it going." And the best thing about our business is that we've got KFC moving in all cylinders in China. And also, as I mentioned in my earlier remarks, we've got Pizza Hut now, which has been dramatically transformed. We're going into 100 -- we're going to open up 100 stores of Pizza Hut this year. We're going into Tier 3, 4 and 5 cities. In Pizza Hut, we only have 500 units. So we are constantly just trying to build these brands the right way. I've always said that we've got these tremendous diamonds. We just got to keep polishing them and growing them the right way. And our people capabilities have never been better, the brand's never been stronger, and Yum! in total is going to have another excellent year.

Richard T. Carucci

Just on the financial side, David, and by the way, I'm in the same place that David is, is I think China is having a spectacular year overall. We are still new at the game of value in China, some of the value initiatives. So the first ones we did were earlier this year in breakfast, and then around April time, at lunch and snacking. So we're still on version 1.0 of doing value initiatives, and all along, we recognize we're going to read the consumer and see what it did. I think we're very happy with the transaction gains that we had. We have quite a bit of growth in breakfast, which is fantastic. We probably had a little bit higher mix to some of those value initiatives that we would have guessed at lunchtime. But we always knew going into this that we could adjust. Now the only thing that makes the adjustment tricky is in the fourth quarter, inflation -- towards the end of the third quarter it was a little higher than what we were anticipating. To your point, we were anticipating high inflation, but the labor inflation, starting the year, we thought would be in mid-teens. And in the quarter, it was 20%, and we think it's probably going to be about 20% in the fourth quarter as well. And then commodity inflation, we thought, would not get up or not get higher in the fourth quarter. So that -- the biggest issue that we probably have is the adjustments towards the value. It will take us a little bit of time, but again, I couldn't be happier with the overall results. The profit results we have year-to-date, excluding ForEx, are 15%, and that's on top of 26% last year. So we feel -- I'll take it as David says. Regarding the unit development, I mean, to me, that's a no-brainer if you could get more units in China. The team is extremely disciplined on development, and one of the good things that came out of the last 5-year plan is that the government is sort of starting to build city clusters around some of the major -- about 20 or 25 major cities. We think that gives us new unit opportunities once some new trade zones will be developed as they're going to build housing in those areas. But they're also building trains and buses and stations and all of that, which those type of infrastructure things help us. So it's really been a combination of that investment and the trade zones, if that opens up for KFC, as well as David in his speech talked about how Pizza Hut is now able to get into Tier 3 and Tier 4 cities much more profitably than before. So that's allowed us to increase our Pizza Hut development significantly. So if I could -- if we could build 600 units a year going forward, and if that causes us a quarter issue with labor, that's like a no-brainer. We still get less than 3-year paybacks on those investments. So we feel great about where we stand in China.

David C. Novak

So in summary, both KFC and Pizza Hut brands have never been stronger. Both brands are more ubiquitous than ever before. We're leveraging our assets throughout the day. We're opening up new units with returns that are at least, if not better, than any that we've ever had, and we're more optimistic than ever about the breadth and future of these 2 brands. And with the China consuming class going from 300 million to 600 million over the next -- in the coming years, we couldn't be in a better place. So very pleased with this year in China.

Operator

Your next question comes from the line of David Tarantino with Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Just a quick follow-up on some of the discussion related to China margins. Rick, I was wondering if you could maybe comment on how the team there is planning to manage the long-term structure of the China margins. I know you've given up a little bit of ground this year, but the economic model still remains quite healthy. So should we think about China as maybe a 20%-type restaurant margin over the next several years, and the plan is not to necessarily recover some of the margins that you've lost this year? Maybe just explain how you're thinking about that business.

Richard T. Carucci

Yes, I think to your point, David, clearly, the inflation this year is higher than normal. So it's hard to chase the inflation when it's that high. Our hope is that inflation, especially commodity inflation, will abate by midyear next year. Labor inflation, we think, will remain high but not as high as it was in the back part of this year. So in terms of how to deal with inflation though, I do want to emphasize that we're in a better position to do it than, we think, everybody else. We have a different levers that I talked about in my speech in terms of different dayparts, strong distribution system, and so we could take pricing in different areas, in different parts of the country, et cetera. And with our capability, we think we're better equipped than pretty much anyone else there to deal with inflation. Part of the game plan is that we will gradually take pricing and catch up to inflation. And then when inflation abates, we'll be back -- to your point, I think we expect, I'd call it at least 20% margins. But, again, we knew that we were off of very high margins a year ago. So we never thought -- going into this year, we didn't anticipate that we would keep that level of margin. So I think somewhere between a little over 20% is probably where the margins will shake out over the next couple of years.

Operator

Your next question comes from the line of Greg Badishkanian with Citigroup.

Unknown Analyst -

It's Jack Holland [ph] actually on behalf of Greg. Yes, it looks like you guys had a nice improvement at Taco Bell this quarter, and maybe even a little bit sooner than you had initially anticipated. I think you called out 4Q for that improvement back in the 2Q. So what do you think are the factors behind that improvement? Has the lawsuit concern sort of abated? And has that momentum continued into 4Q as well?

David C. Novak

Well, I think that Taco Bell is making steady improvement, but a slow improvement, and we're obviously not pleased with our same-store sales. Any time your same-store sales are down, you can't be at all pleased about it. But to your point, we have improved. We went from down 5% in the second quarter to down 2%, and our 2-year numbers are plus one, if you look at a 2-year basis. But I think it's been just more of the same without any real significant breakthroughs. And what we've really been working on this year is, first of all, just across the board and around the world at Yum! Brands, we've been focused on operational excellence and making sure that we deliver a great experience to our customers. We've been focused on maintaining our #1 value initiative. But what we really think is going to really get Taco Bell moving and back on the growth track is more category innovation. And so what I'm really pleased about is this year, we have proven and test marketed that we do have exactly that coming forward, which will be launched at the end of first quarter. Taco Bell, in conjunction with our 50th anniversary, will be reinventing the taco. We've got some major news coming. So I think you're going to see some pretty much blocking and tackling, more of the same until we get to the end of the first quarter, and then we think we'll have a significant uplift in our business.

Richard T. Carucci

And just to add to David's comments about what we see through the balance of the year and into the early part of next year, just as a reminder, the laps for Taco Bell do get a little bit more challenging in Q4. So that, combined with the fact that, as David said, the real look forward is the new innovation coming at the end of Q1 next year.

Operator

Your next question comes from the line of John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

I have 2 questions. The first one is, is it worth or is it even possible in China to get better visibility on pricing for -- on food for the security purposes? In other words, McDonald's is experiencing what they claim is low single-digit inflation right now. And I know you can't speak to that specifically, but it does underscore that it is possible to get lower volatility in food. It would seem that since you've got the ownership and the distribution, you would have a natural advantage there and see lower volatility, and yet you're seeing higher volatility. So can you explain why that is the case? And is there a movement, not a change, of how you purchase food to avoid these situations in the future?

Richard T. Carucci

I really, John, can't talk to McDonald's, but I will talk to what we have. I mean, if you look at -- to your point, if you look at what our food inflation has been, if you go out and go to the last 5 or 6 years, it's been way below what the inflation rate has been for food. And we were getting purchasing efficiencies and all of those benefits as well. So we have a world-class supply chain group in China. We have very strong distribution. So our costs are very, I think, very well-managed there. The challenge that we've had really has been on the proteins the last several years. So when you've seen this spike, it's been really related to -- we think it's been going with the market on both pork and chicken. So pork has had a lot of several price spikes the last few years. That has impact on [indiscernible] because those are the 2 leading proteins in China. So that's really what's been driving the volatility, we think, on the chicken has really been what's happened on the pork side in China. We're hoping that, that will abate early next year on the pork side, and it will start seeing better chicken cost, I'd say starting in around the second quarter next year, but that's a guess at this point. We'll give you better data if we have it in December.

John S. Glass - Morgan Stanley, Research Division

Okay. And then can you just decompose that 700 basis points pressure you talked about, Rick, on the labor side between wage rate inflation, what the openings put on that? And then on the food side, what's just the inflation versus what's the impact of these promotions?

Richard T. Carucci

Yes, if you just want to think about it simplistically on a year-over-year basis, there's obviously a lot of moving parts. If you take 8% food inflation on our base of about 34% or so, you get a little under 3 points of inflation on the food side. If you take 20% inflation on labor, which was about 14% last year of our base cost, that gets you to, again, a little under 3%. So food inflation and labor inflation in Q3 is equal to about 6% impact on margins.

John S. Glass - Morgan Stanley, Research Division

I'm sorry, and then the remaining 100 basis points has to do with the value promotions?

Richard T. Carucci

Well, yes, and then there's a lot of other moving part points. In my speech, I talked about the business tax, the Expo lap. In Q3, that was about 1 point, but then you obviously have benefits from transaction gains, et cetera. But from an inflation standpoint, it was about 6 points of the issue. Unfortunately, in Q4, that goes up to about 8 points because we said we expect mid-teen in inflation on the food side and still about 20% on the labor side. And so the September price increase will basically offset that increase. And then I mentioned before, we're going to tweak our value initiatives, which will be another step in that direction. But yes, that's what we didn't expect. We didn't expect the fourth quarter to be 2 points higher than the third quarter, so that piece we were taken by surprise on.

Operator

Your next question comes from the line of Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I was curious to follow up on your comments about rightsizing the cost structure in the U.S. Now with operating profits down as much as they are, are we talking about just sharpening the pencil or further on the spectrum, a formal restructuring or somewhere in the middle? What kind of things are you looking to do?

Richard T. Carucci

Well, we've always looked aggressively at our cost structure. We've also -- over time, we mentioned where we continue to refranchise our business in KFC, and therefore, as we do that, that will have a modest impact on our cost structure. We will continue to look at this, and we're still developing plans as we go forward. We'll probably have more to say on it in the fourth quarter, Mike.

Michael Kelter - Goldman Sachs Group Inc., Research Division

All right. And then on an unrelated kind of housekeeping note, from a financial perspective, what should we expect the impact of the Long John, A&W and Pizza Hut U.K. refranchising on the P&L? Are those actions accretive, dilutive or roughly break-even? What do you think?

Richard T. Carucci

About break-even. The LJS will be very slightly negative impact, about flat. And then the Pizza Hut U.K., depending on when it occurs, will be slightly positive.

Operator

Your next question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Rick, first, a simple one. If you said this, excuse me, but what are you thinking on the full-year tax rate? Are you still thinking around 26%?

Richard T. Carucci

No change there. Again, as we said before, it's the hardest one to predict. Just so -- it moves around based on onetime events. That's just how the accounting works.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then another question on the China margins. The strength in breakfast and the development of the delivery and even the 24-hour business, are all of those dilutive to margins? And can you quantify the impact of developing those additional sales layers, the impact on margins?

Richard T. Carucci

In breakfast -- what we're selling now at breakfast is probably about 8 points higher of food cost as a percentage of sales basis than the rest of the menu. Delivery, I really can't speak to.

Operator

Your next question comes from the line of Larry Miller with RBC.

Larry Miller - RBC Capital Markets, LLC, Research Division

Yes, 2 quick questions as well. So you mentioned tweaking the value menu in China. Can you give us a sense of what you're doing and how you might stack up competitively? It looks like a lot of other folks are doing value as well. And then secondly, just on the negative mix in China, you said half of it was related to your value initiatives. What would you describe the other half to?

Richard T. Carucci

Sorry, could you repeat the second part of the question again?

Larry Miller - RBC Capital Markets, LLC, Research Division

So you had a negative mix in China. I think it was close to 8 or 9 points of negative mix. You said half of that was related to the value initiatives at breakfast. What's the other half on the negative? Is it consumer pushback on pricing? Is it some other initiatives that you have? Or is it competitive pressure? What might be the other half?

Tim Jerzyk

Yes, Larry, I think -- we're assuming you're talking about check average. We said breakfast was about half of that. If we're wrong on your -- the assumption list, no, but the rest of it would be the value initiatives at lunch and afternoon snack.

Richard T. Carucci

And we're not going to tell you, obviously for competitive reasons, exactly what we're going to do on the value side, but we're looking at those bundles. So, for example, we have a 6-RMB offering at breakfast and a 15-RMB offering at lunch, and we're looking at what the composition of those bundles are.

Operator

Your next question comes from the line of Jason West with Deutsche Bank.

Jason West - Deutsche Bank AG, Research Division

Just 2 questions. First, on the outlook for 2012, I know you don't want to get too specific. But big picture, should we assume another sort of above-average type of year on China comps, given the amount of pricing you're probably going to have in the menu for next year? Or how should we think about the mix versus traffic? You're lapping some big traffic numbers but also some big negative mix numbers. Just trying to think about the components of comps in China next year.

Richard T. Carucci

Yes, it's a hard one to call. To your point, we are going to get the benefits of pricing. On the other hand -- we expect that to continue into next year. On the other hand, we're lapping some extraordinary large increases in transactions. So we just don't know where it will shake out, to be honest with you. But again, I do want to remind you, our model doesn't require the type of sales growth that we had this year. Our model requires I think about a 5% or 6% same-store sales growth. So we may have more visibility as we get deeper into this year, but obviously, we expect the fourth quarter to still be strong. We have a lot of momentum right now.

David C. Novak

I think the other thing too is that as we look at the sales, remember, we're very early days in all of the daypart initiatives that we're driving up against. So breakfast, for example, is only 7% of our total sales mix. We've only got delivery in 1,500 units. So we're in 24-hour services. All this is early days on the asset leverage. And we of course will have lots of product news, like we have in our China business, above brand. So I think there's tremendous upside as we go forward.

Jason West - Deutsche Bank AG, Research Division

Okay. And just a quick one on the unit growth. Is the 600 number for China kind of the number going forward that we're using for 2012 as well, I'm assuming?

Richard T. Carucci

I think it's as good a number as any right now.

Operator

Your next question comes from the line of John Ivankoe with JPMorgan.

Unknown Analyst -

It's Ahmoud Ganomon [ph] for John. Just in terms of the U.S., it sounds like you've committed yourself to a pretty major reinvestment in terms of Taco Bell beginning early next year, and I know that the brand probably does have the highest probability of your 3 brands. But it does seem like the return on investment would be higher if you directed it towards maybe an acceleration of growth in one of the international businesses. So could you just talk a little bit about your thoughts based on the "you earn the right to own" premise about refranchising that brand, potentially even down to 5% like KFC and Pizza Hut?

David C. Novak

Well, first of all, we have the "earn the right to own" mentality around the world. So we're looking at Taco Bell just like we've looked at Pizza Hut and KFC, and we do think that there's some opportunity there. I think in terms of next year, I don't think we look at it as a year of reinvestment. We just think we look at it, a year a lot of the investments that we've made paying off, because we've made investments in the pipeline. We have some proven products that we feel good about, and we expect that we'll be able to drive the top line. The biggest thing that's impacting our business at Taco Bell this year is the sale de-leverage, and we think we ought to be able to get same-store sales growth as we go forward. We're also going to be expanding breakfast next year in the Western part of the United States, and we think that will begin at March, towards the long-term rollout of breakfast on a national basis.

Richard T. Carucci

And, John, just to build on David's point, the margins and the profit history of Taco Bell over the last decade has been quite different than KFC and Pizza Hut, and that will be reflected in our plans.

Operator

Your next question comes from the line of Jeffrey Bernstein with Barclays Capital.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

A couple of questions, just first looking to -- on the China front, I think you mentioned a couple of times that momentum thus far in the fourth quarter has sustained itself. Obviously, we've heard a lot of cautionary comments on China and the slowing in trends. So just wanted to confirm that over the past months, since these results are reflecting that you're not seeing any deceleration or any shift in kind of the consumer spending habits on the China comp. And then just kind of looking at China with the high teens comp you're doing right now, once you lap the value side of things, like where do you think is the underlying run rate x the value that we should be assuming? Like how much of that comp lift that you're getting is value-offer driven, so we can kind of assess the underlying run rate? And then I have a follow-up.

Richard T. Carucci

We don't discuss trends within a quarter, but we do discuss that there's a major change from the last quarter. So we have nothing to tell you, which I guess tells you something. Regarding what the underlying rate -- it's really hard to call. There's just too many moving parts: the different inflation rates, different labor rates, et cetera. What I would say though is that I've seen a lot of reports on China, and people are trying to estimate what's going to happen in their economy. And I'm not sure if they're going to be any better than people trying to estimate what happens in the U.S. economy. I think from our business, what we keep our eye on is the point that David made earlier about what's happening in the middle class. And everything that we see is that the increases in the labor rates, the people moving from the countryside to the city, the establishment of these city clusters, et cetera -- I sort of like those type of macro trends, and to me, I haven't seen any deterioration of those. If anything, I think the 5-year plan may have helped us a little bit because labor is going to grow a little bit -- labor rates are growing a little bit faster, and we're going to get that infrastructure in those city clusters. So I feel pretty good still about the, I call it, the broad macros. In terms of month-to-month, quarter-to-quarter economic trends, I don't know if we're any better than anybody else who's out there. But as I sort of said before, I feel we could deal with the environmental shifts, whatever they are, pretty well given the quality of our team, our national presence and the different dayparts that we have.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Okay. And then just to follow up, you mentioned Taco Bell, specifically next year, obviously benefits from having easy compares as you mentioned. And then it seems like the back half of the first quarter, you're pretty excited about the product innovation. I'm just wondering whether the breakfast reference was something totally additive to those other things. Any color you can give. I know breakfast has been a focus for a long time now, and it's been in test for a long period of time. I'm just wondering if you can give any color in terms of what you're seeing in the test markets to give confidence to roll it out in '12, at least to the Western part of U.S.

David C. Novak

Well, we've had test markets in the Western part of the U.S. which says basically we'll be able to expand breakfast there and do it well. And we're continuing to develop the breakfast daypart and our product innovations around that and how we approach value for the rest of the country. So we're beginning the rollout in the area where we think that we have the greatest opportunity for success.

Richard T. Carucci

Yes, I think it will only have a modest impact next year. I think the bigger thing that we're trying to do at breakfast is -- we mentioned a while back, we're doing, I call it, gradual breakfast, where we're opening earlier and serving breakfast items and then continuing those breakfast items for a good part of the day. So we think that given that trend, that we could get a fair number of franchisees to pick up breakfast over time. So the first tranche of that is really in the West next year. So I look at that as a key. If that's successful, then the other parts of the country should be able to go along, because it's not nearly as big an investment than when you're opening up very early for breakfast and have the labor challenge that we've had before. So I think what you'll probably see happening is a gradual roll and a gradual impact on sales.

Operator

Your next question comes from the line of Farah Fenatore (sic) [Sara Senatore] with Sanford Bernstein.

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

It's Sara Senatore at Bernstein. So actually, I just wanted to follow up a couple of things that have been touched on already. One was the unit growth outlook in China. Actually, I had sort of been hearing -- I think for a while, we've been hearing this idea that unit growth would -- like the number of units would step up, but the pace of unit growth would slow. But it actually feels like the pace of growth is kind of holding steady, so I wanted to see if anything had changed there. And then the second question was more about back to the inflation issue, which is only that historically most of your inflation, I think, and certainly most the volatility has come from food. So we could be fairly comfortable that your comps would kind of move with that food inflation directionally, generally speaking. Now a lot of it's coming from wages. So is there any concern that it won't be -- the matching won't be quite as good between what you are able to do on the top line and what kind of margin pressure you're seeing on that line item?

Richard T. Carucci

Let me do the second question first. I think the inflation piece, the volatility just makes it hard to get the timing exactly right. So I think that to your point, the commodity inflation will probably dictate what happens to quarterly margins. So the labor side of it, to your point, is a structural component. But as you also pointed out -- so we expect that to continue. So we expect high labor inflation to continue, not at the pace we had in the third quarter, but it's going to be at least double-digit. It could even approach the mid-teens, would be our guess over the next couple of years. So we think that's structural, but to your point, we sort of know that's coming, so we could plan our margins and our pricing accordingly for that. It is a commodity thing. It's a harder one to call, and therefore, that's the one that we may get ahead of or behind on over time. In terms of the development part of your question, if you really look at it, it's really hard to predict when do we get the spike in development. But it hasn't been a continual climb. So if you look at what's happened historically, we were about 250 units, and we were at that for a few years. Then we went up to the 350 to 400, and then we quickly went to 500. And then we've been at 500 for a few years now. And so we couldn't call when we would get to the other jump. So what we used to say to your point -- or what I personally used to say is we expect the absolute numbers to go up, but the percentage to go down just because our pace -- our base keeps getting bigger. I think, over time, that's probably still a good generalization, but we have a hard time predicting when the spikes will come. We didn't know that they would do these city clusters. We weren't sure when Pizza Hut dine-in would get more profitable in Tier 3 and Tier 4 cities. So that's just hard to call. So right now, I feel very pleased we're at a 600 base, and we'll just have to play it by ear from there.

Operator

Your next question comes from the line of Mitch Speiser with Buckingham Research.

Mitchell J. Speiser - Buckingham Research Group, Inc.

In emerging markets, in general, the comps seem to be very strong, obviously driven by your brand and compelling value. But if we were to drill down to perhaps the relationship between wage rate growth and comps growth, do you find a clear correlation between the 2? And if so, does that maybe make the year-ago comparisons less important when you're thinking about setting your comps targets?

Richard T. Carucci

It's a good question. We don't -- I don't know if we have enough data, because you had the spike-up occurred just this year. So we think it's generally unbalanced. It's probably a good thing. In the short term, it's harder because we have to deal with it from a pricing and managing-the-inflation side of it, but it is bringing more people in terms of affordability into our restaurants. And we just don't have the visibility to give you sort of more math around that. So that's just sort of what it looks like at a broad basis.

Mitchell J. Speiser - Buckingham Research Group, Inc.

Okay. And just a quick follow-up. With traffic up so tremendously, are there any capacity issues? It sounds like most of the traffic was probably at breakfast or the increase, which is probably low capacity. But when we think about KFC in particular in China, can you just talk about any capacity constraints whatsoever?

Richard T. Carucci

Well, we had a lot of units. I mean, that's one of the reasons we had units is to make sure we could still provide a great experience to our customers. Breakfast, we were -- we knew we had capacity at breakfast. So we weren't really capacity-constrained there at all. That was a daypart that was light. So we had to bring some more labor in over time. We actually started breakfast a long time ago. So we have still a lot of capacity at breakfast. Our hardest time is still weekends. So our biggest capacity situation are weekends. So, for example, when we did the daypart initiative in China that was a weekday-only lunch initiative, as an example. So that's probably where our biggest bottleneck is. And the way we relieved that bottleneck has been through adding units, and as David's mentioned in the past, we should have really good operations there as well. So we think we're still providing good experience to our customers, and when the lines sort of get too big, we sort of build more units.

Operator

Your next question comes from the line of Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

Just a question on YRI. At the company store base, the AUVs were up 35%. I'm just having a little bit of a hard time understanding that against the system comp of, let's say, 3%. So I know that FX and both the Mexico refranchising helped, but they can't account for the whole difference. If you could just help me get a little bit of an understanding of, say, where that AUV growth is coming from. Is it different comps at company stores versus franchise? Is it because most of the new company openings are in France where AUVs are high? And then one quick follow-up to that. Well, I'll come back to the follow-up. Let's start with that.

Tim Jerzyk

Keith, it certainly is the portfolio mix issues that we talked on several occasions in the past. France is definitely entering into the mix with the highest average unit volumes. And then also, same-store sales have been stronger this year in company stores.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. And then the follow-up is, as you refranchise Pizza Hut U.K., whenever this happens, it's roughly 470 units. It's 1/3 of the YRI company store base. As that happens, like, what does this do to company AUVs and margins? Just a general direction or more detail. Whatever you'd be willing to offer would be helpful.

Richard T. Carucci

The AUV is probably not as big an impact. Margins will be very favorable, probably about 1.5 points or so. We'll have to give you the math as we get closer to it.

Operator

There are no further questions, sir. Do you have any closing remarks?

David C. Novak

First of all, I'd like to thank everybody for being on the call. Yum! Brands is going to have another very strong year, achieve at least 12% earnings per share growth. I'd also like to -- today, since this is our founders' week, I'd like to thank all of our shareholders who have been so supportive over the year. We have a number of shareholders who've been with us from the very beginning. So I'd like to thank you for that support. We've done well at Yum! Brands in the past. What has us most excited is about what we can get done in the future. We believe in our business model, we believe in our brands, and our people capability has never been better. So I am very confident that we will be able to continue to deliver. So thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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